labels: Bank general, Economy - general
What do bankers read into RBI's credit policy? news
29 April 2008

Reserve Bank of India Governor YV Reddy has done it again. He has hiked the Cash Reserve Ratio, or CRR, which is the funds that banks have to park with the central bank, by 25 bps to 8.25per cent. Contrary to most market expectations, he has left the repo, and reverse repo rates unchanged.  

So, what do bankers and economist read into Reddy speak? 

KV Kamath, Managing Director and CEO, ICICI Bank, said the CRR hike is likely to suck out about Rs 8000 crore from the system. He feels the hike will not impact the banking sector significantly. "We need a supply side response to contain inflation." 

Kamath feels there is need for a supply side response to tackle inflation. 

Abheek Baruah, Chief Economist, HDFC Bank, doesn't see an across the board increase in the prime lending rates but in some select categories where banks perceive pricing power or where they want to reduce exposures. "Demand conditions in the credit market do not warrant an across the board increase in lending rates by banks because credit demand is dwindling and there is genuine downward pressures in categories like retail credits.  So, they will perhaps go and hike the effective lending rates."      

He feels the clear emphasis now is on liquidity and M3. "The best way to get this down is to keep sort of increasing the reserve ratio and that's clearly the tack at this stage. It is reasonably hawkish but not hawkish beyond a degree. It could have been far more aggressive on the inflation front using perhaps a combination of both CRR increase and a repo rate hike. So, it clearly does factor in some growth concerns but doesn't entirely sort of give in to the needs of growth and keep an eye on inflation." 

Ajay Mahajan, Group President-Financial Market, Institution and Investment Management, Yes Bank, feels the CRR hike could result in liquidity in the system getting pressured in the wake of the upcoming government bond auctions as well as the spiraling oil pool deficit account, which would lead to far significantly higher oil issuances. "The market would continue to expect further tightening measures given that the repo rate hike has not come through." 

He sees more policy action from RBI going forward. ''The CRR hike will effectively mop away the excess liquidity created as a result of foreign exchange intervention of about $ 2-3 billion in the preceding period last week. "I feel moderate liquidity conditions would be allowed to prevail in the wake of rising inflation. That is the first thing that RBI will probably focus on. If not repo rate hikes we are certainly going to see more CRR action going forward, given that the foreign exchange flows in the country have been fairly strong." 

According to Mahajan, the CRR hike will shave off 10 bps from the banks' bottomline. 

Nilesh Shah, Deputy MD, ICICI Prudential, said the hike would certainly put pressure on banks' ability to price their lendings. ''Since they haven't been revised for almost an 75 bps hike, probably there is a need to tinker around a little. However, since the repo and the reverse repo have been kept unchanged, maybe some banks will probably take a call based on their asset liability mismatch and that there is no need for revision. So, it's not going to be a consensus decision as some banks may raise interest rates while others might decide not to raise interest rates.'' 

Ajay Shah of IGIDR, or Indira Gandhi Institute of Development Research, also shares Ajay Mahajan's view. He feels a 75 bps cut will shave 10 bps off the banks' P&L. "However, it won't rein in inflation. To politicians, it is really important for the UPA to bring inflation back under control in time for elections, so it leaves the big question dangling as to how are we going to get inflation back under control." 

Shah feels that only a rupee appreciation can materially impact inflation in time for the next elections. 

Arun Kaul, GM-Treasury Finance, PNB, said RBI had not given any indication on the hike in interest rates.  He feels the CRR hike was prompted by higher money supply than what was anticipated by RBI. "As against the budgeted 17-17.5per cent, actual money supply has been 20-21per cent. Now, they want to bring it back to 17per cent. Inflationary expectations could be controlled. So, clearly the focus of RBI is on inflation control and reducing liquidity."

He feels it will be premature to say whether this would adversely affect the banks in terms of deposit cost. "We will have to wait and see how cost of deposit shapes up and is there a need to pass the burden to the consumer or not.''

Hitendra Dave of HSBC India said RBI's focus is very much on the short-term and the CRR hike is a reflection of that. "Their continuing focus on liquidity that they may do something more also on the CRR front, would seem to suggest that it is going to be on liquidity rather than on rates."


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What do bankers read into RBI's credit policy?